Roughly a year ago, I explained to those who subscribe to BoomBustBlog that NYC real estate ever finished correcting. As a matter of fact, it has some ways to go, as does DC real estate. The reason why NYC and DC markets levitated was because the Fed pumped trillions into Wall Street to reflate the bubble which was (and still is) the zombie banking system. DC saw federal spending attempt to replicate organic economic growth. Are any of these methodologies sustainable or practical. Do bulldogs have pleasant breath?

Morgan Stanley (MS), owner of the world’s biggest brokerage, is capping immediate cash bonuses at $125,000 as the firm curtails pay and defers more compensation for senior executives, according to a person briefed on the plans.

Members of the company’s operating committee, led by Chief Executive Officer James Gorman, 53, won’t get any immediate cash, said the person, who declined to be identified because the plan hasn’t been made public. Mark Lake, a spokesman for the New York-based bank, declined to comment.

The decision comes after a fourth quarter that some analysts predicted was the worst for trading and investment- banking revenue since the financial crisis. Increased salaries and previous moves toward deferring more pay have limited investment banks’ flexibility to cut compensation costs, analysts including Atlantic Equities’ Richard Staite have said.

Morgan Stanley’s decision will increase the average amount of pay deferred to about 75 percent, the person said. The firm deferred an average of 60 percent in 2010 and 40 percent in 2009. Deferred cash for 2011 performance will be paid out in two equal installments in the final month of 2012 and 2013, a change from the previous deferral plan that paid out in thirds over 18 months, the person said

Last year I felt compelled to comment on Wall Street private fund fees after getting into a debate with a Morgan Stanley employee about the performance of the CRE funds. He had the nerve to brag about the fact that MS made money despite the fact they lost about 2/3rds of their clients money. I though to myself, "Damn, now that's some bold, hubristics@$t".So, I decided to attempt to lay it out for everybody in the blog, see "

The example below illustrates the impact of change in the value of real estate investments on the returns of the various stakeholders - lenders, investors (LPs) and fund sponsor (GP), for a real estate fund with an initial investment of $9 billion, 60% leverage and a life of 6 years. The model used to generate this example is freely available for download to prospective Reggie Middleton, LLC clients and BoomBustBlog subscribers by clicking here:Real estate fund illustration. All are invited to run your own scenario analysis using your individual circumstances and metrics....

... Under the base case assumptions, the steep price declines not only wipes out the positive returns from the operating cash flows but also shaves off a portion of invested capital resulting in negative cumulated total returns earned for the real estate fund over the life of six years. However, owing to 60% leverage, the capital losses are magnified for the equity investors leading to massive erosion of equity capital. However, it is noteworthy that the returns vary substantially for LPs (contributing 90% of equity) and GP (contributing 10% of equity). It can be observed that the money collected in the form of management fees and acquisition fees more than compensates for the lost capital of the GP, eventually emerging with a net positive cash flow. On the other hand, steep declines in the value of real estate investments strip the LPs (investors) of their capital. The huge difference between the returns of GP and LPs and the factors behind this disconnect reinforces the conflict of interest between the fund managers and the investors in the fund.

re_fund_returns.pngre_fund_returns.png

re_fund_returns_tables.pngre_fund_returns_tables.png

Under the base case assumptions, the cumulated return of the fund and LPs is -6.75% and -55.86, respectively while the GP manages a positive return of 17.64%. Under a relatively optimistic case where some mild recovery is assumed in the later years (3% annual increase in year 5 and year 6), LP still loses a over a quarter of its capital invested while GP earns a phenomenal return. Under a relatively adverse case with 10% annual decline in year 5 and year 6, the LP loses most of its capital while GP still manages to breakeven by recovering most of the capital losses from the management and acquisition fees..

Now, that we're on the topic of Morgan Stanlely, real estate, and bonuses, keep in mind that there is never just one roach. If Morgan Stanley is slashing bonuses to this extent, so are the other big banks. Remember, I have warned extensively on Goldman Sachs, the big bank that can't trade...

Summary: This is the first in a series of articles to be released this weekend concerning Goldman Sachs, the Squid! In this introduction (for those who do not regularly follow me) I demonstrate how the market, the sell side, and most investors are missing one of the biggest bastions of risk in the US investment banking industry. I will also...

Hunting the Squid, Part2: Since When Is Enough Derivative Exposure To Blow Up The World Something To Be Ignored?

Welcome to part two of my series on Hunting the Squid, the overvaluation and under-appreciation of the risks that is Goldman Sachs. Since this highly analytical, but poignant diatribe covers a lot of material, it's imperative that those who have not done so review part 1 of this series, I'm Hunting Big Game Today:The Squid On The Spear Tip, Part...

For those who don't subscribe to BoomBustblog, or haven't read I'm Hunting Big Game Today:The Squid On The Spear Tip, Part 1 & Introduction and Hunting the Squid, Part2: Since When Is Enough Derivative Exposure To Blow Up The World Something To Be Ignored?, not only have you missed out on some unique artwork, you've potentially missed out on 300%...

Hunting the Squid, part 4: So, What Else Can Go Wrong With The Squid? Plenty!!!

Yes, this more of the hardest hitting investment banking research available focusing on Goldman Sachs (the Squid), but before you go on, be sure you have read parts 1.2. and 3: I'm Hunting Big Game Today:The Squid On A Spear Tip, Part 1 & Introduction Hunting the Squid, Part2: Since When Is Enough Derivative Exposure To Blow Up The World Something To...

Dr. Benjamin Shalom Bernanke, AKA Dr. FrankenFinance, Has Successfully Caused NYC Condo Prices To Be The ONLY Major Condo Market To Rise In Price

As excerpted...

Yesterday, I illustrated how NYC is pulling away from all of the other major condo markets - see "Why Is NYC The Only Major Condo Market Increasing In Price?". According to the S&P Case Shiller Condo index, is the only major US condo market that not only has firming prices but is actually increasing in price. Chatter and anecdotal evidence from the ground confirms this as developers and speculators are once again bidding up development land, lots and potential conversion properties.

In the afore-linked piece, I gave what I consider to be the cause of this "newfound", yet hard to come by value. The answer??? Dr. Benjamin Shalom Bernanke. You see, Dr. Bernanke has taken over the helm of the "Great Global Macro Experiment” from Alan Greenspan and has supercharged it to the nth degree - all primarily to save our insolvent banking system. Where is the nexus of banking and finance in this country? Answer, right where you see that little positive blip in a chart of otherwise sharply downward trending assets. Trust me, it is not as if there is any dearth of condo unit supply in our dear city, as can be seen in “Who are ya gonna believe, the pundits or your lying eyes?”. As excerpted from yesterday's post, here is that same area about a year and a half later...

Now, to remind all exactly how much capital and resources Dr. Bernanke pumped into the NYC area, be aware that this industry was literally on the verge of collapse in 2008 (with two of the five biggest banks literally collapsing and the balance getting bailed out by the government right before they collapsed), yet paid out record bonuses on record earnings less than 8 quarters later. This is even more amazing considering the only fundamental change in to the Frankenstein Monster assets that contributed to these banks [near] demise is that they have further PLUNGED IN VALUE! Yes, I do mean Frankenstein assets. I implore you to delve in further - "Welcome to the World of Dr. FrankenFinance!"andFinancial Innovation vs Financial Fraud.

This near cessation of foreclosure activity has materially dropped the shadow inventory numbers, but has done so in a way that is quite misleading. Those foreclosures either will happen and become REOs or distressed property sales that are currently averaging a discount of ~25% to conventional retail sales (thus further pressuring sales prices), or will result in the properties being put directly on the market at steep discount (again, further pressuring sale prices). Basically, the foreclosure backlog is simply accumulating in the background and will print a very sharp spike upwards one way or another once the foreclosure and fraud issues of the banks are sorted out – even if they are sorted out to the detriment of the banks. Despite this reprieve in foreclosures, the ratio of shadow inventory to home sales is not decreasing. This is a double negative, for shadow inventory is decreasing (albeit for very artificial and temporary reasons). The reason for the lack of movement in this very key figure is that housing sales are actually declining both on a seasonally adjusted and non-adjusted basis – and if these figures were to be adjusted for “true” inflation, would look much worse. This leaves the ratio of delinquent and foreclosure activity to sales relatively static. One can surmise what happens when the foreclosure backlog that was caused by the bank’s myriad legal issues clear up.

The most valuable chart in the study just released to subscribers, Shadow Inventory Update-- March 2011 shows how quickly one can expect the shadow inventory to be consumed by the sale of homes. To make a long story short, we still have quite a ways to go before we reach the pre-bubble levels, and that is without taking into consideration the foreclosure moratoriums. Keep in mind that these numbers do not include the pent up shadow inventory that is being hidden by the foreclosure crisis. That additional inventory on top of a slowing housing sales metric can easily tack one to 4 years onto the inventory numbers.

As you can see, the credit (delinquency measures) metrics are actually moderating slightly over the last few quarters, but have increased over the last two. This is a negative sign considering all of the efforts that have been made by the government and the banks to reduce that figure. The foreclosure inventory, although lulled somewhat, is still slightly on the rise. This lull is synthetic and temporary, a by-product of congressional pressure and legal issues pressing the banks to undergo voluntary and involuntary moratoriums on foreclosure activity. The consequent movement to be expected as these moratoriums are lifted, the banks work out their legal issues, and the properties move one way or the other will cause a very dramatic spike in the shadow inventory numbers. This spike will occur on top of slowing housing sales, dramatically reduced housing prices metrics and potentially deteriorating credit metrics (if the most recent trend continues). If that is not enough good news for you, the Goldilocks scenario of the perfect interest rate environment for real estate needs to (and probably will in the near to medium term) come to an end. SeeThe True Cause Of The 2008 Market Crash Looks Like It’s About To Rear Its Ugly Head Again, With A VengeanceFriday, March 11th, 2011. Our calculations available ot subscribers show a very bleak outlook for housing. It is not as if there is no precedence for such. Take a look at the Japanese situation, and this is not taking into consideration the recent issues of the earthquake, tsunami and radiation poisoning and nuclear meltdown. Few things are as detrimental to property values as radiation poisoning!

A lesson to be learned: Beware for when a true black swan event occurs...

Oh Reggie, so negative on NYC. Don't you know that police commish Ray Kelly just got a special award for keeping NYC safe for rich heterosexual white males? So at least you got the rich hetero male part covered,:

JPMorgan Chase suspending all debt collection and summarily firing all the collection office staff to avoid investigation. Probable mass fraud/credit card balance fabrication/robosigning of consumer accounts being sold off for collection.

I have a hard time believing that the best and brightest are living paycheck to paycheck... and NY real estate has been massively overpriced because of the Wall Street distortion anyway. A few dead REITs and bankrupt Trump types is a good thing.

RE in aggregate (who cares about demographic) has another 50% OR MORE to decline. My sources say the Midwest is due for 80%+ decline!! It's nothing but a fraud-hologram everywhere one looks in the US (worldwide??). People have no money, they have debt, and nothing but. No homes moving except for government giveaways.

If you bought or are planning to by a home anywhere in the near future you are the sucker, and will get your ass handed to you in the next 5-9 years (or longer).

Rent and wait. Housing is a fucking racket and fraud-magicians tricks only work so long. Anyone selling ain't selling, that is a fact. Same with new automobiles -- all gimmicks to distract from the mountain of shit under the rug while coward uncle sam looks the other way ignoring all matters of socialized crime!

You can thank this anonymous poster later, RE ain't coming back (appreciating more than manipulation) in a generation.

Reg from one Nyer to another, NYC is a blubble within a bubble. We're about the same age and probably both miss the old NY.. grime and all. It's done for a generation. Not even to mention Bklyn, which was once an industrial ctr itself. I remember going to my Aunt's house in Bklyn hts and watching the Ships in Bklyn harbor. Great memories. My Grandfather worked on the Empire st bldg & other landmarks, bulit in 3 yrs in the GD.

I used to stroll down 42nd St and be accosted by hookers, druggies, nutters - you name it... I'd have a pocketful of flyers for every illicit service imaginable by the time I got to the office- them were the days!

Then that royal pain-in-the-ass Guiliani decides he wants to clean things up - completely ruined the ambiance of the place... now all you have are tourists getting lost and asking the way to the Disney Store, Morgan freekin' Stanley in Times Sq - on the EXACT site where my fave strip joint used to be! THey even had a $10 All You Can Drink beer special on Fridays - with a complimentary lap-dance thrown in for regulars.

why Greenwich? curious about that view since it is a natural draw for those escaping NYC, particularly those with children. basically you can get access to great public services/schools for $500/sf and $3/sf in property tax whereas in the city, you're buying crap below $1,300/sf and pay $7/sf in property tax plus $5/sf minimum for maintenance and then the big whopper - $34/sf at least for two private school tuitions. you could rent in either location but in Greenwich you get twice the space and great public services included.

the bottom line is we're in a position where the incremental USD earned in becoming less attractive given our tax code and likelihood of higher taxes, so it would make sense to turn into part time consultants, run our own money, keep earned income on the lower side (thus minimizing the impact of AMT) and max the shit out of deductions, like mortgage interest. you can't do that in NYC but you can easily do it in Fairfield County at current prices.

I guess my comment in the Morgan Stanley bonus post was prescient ;-) I thought last years tour of the NYC real estate pyramids was hilarious. You should do an update. Maybe a music video. I can help with ideas if you want.

My (then) four year old daughter made it for me and I promised her I wouldn't take it off. It has been in a Forbes interview, two Crains NY interviews and two European/international documentaries - it really has gotten around. I guess now you know who the boss is in my family :-)

What about the GSE pricks...how are they doing in the bonus department?

Here's a brief half-assed history on these bastards:

FRANKLIN RAINES [D] – FNMA CEO (1999 – 2004) Raines accepted “early retirement” from his CEO position while the SEC pretended to investigate accounting irregularities. Fannie’s own OHFHEO also accused him of abetting widespread accounting errors, including the shifting of losses, so he and his fellow execs could “earn” large bonuses. The WSJ reported back in 2008 that Raines was one of several cronies that received below market rates for mortgages from Countrywide. Raines alone receive loans for over $3 million while CEO of FNMA. Raines’ compensation for his “work” at FNMA - $90 million.

RAINES GRADE – F

DANIEL MUDD [R] – FNMA CEO (2005 – 2008) Before becoming CEO of FNMA, Mudd worked at the Office of the Secretary of Defense, was an advisor to Asia-Pacific Economic Corp., “served” on the board of the Council of Foreign Relations, “consulted” at the World Bank, and held many positions at GE Capital including president and CEO. Mudd was dismissed as CEO of FNMA when FHFA became conservator in 2008. In 2011 Mudd and other GSE execs were charged by SEC with securities fraud. After his career at FNMA Mudd became CEO of a NYC hedge fund named “Fortress”. Fortress invested in purchasing tax liens on delinquent property taxes from local governments under many benign corporate names such as “Pleasant Valley Capital” and “Travis Farm Investments”. Cozy. Mudd’s compensation for his “work” at FNMA - $80 million.

MUDD GRADE – F

NEEL KASHKARI [R] – FNMA CEO (Tenure is murky) Kaskari was a former investment banker for Goldman Sachs, was tapped by Hank “The Shank” Paulson to lend his skills over at TARP HQ, and now rather ironically, continues God’s work as a Managing Director at PIMCO. Kaskari’s compensation for his “work” at FNMA is also murky; I’ll just assume it was too much.

KASHKARI GRADE - F

HERB ALLISON [D] – FNMA CEO (2008 – 2009) The esteemed Mr. Allison was quickly whisked off to oversee the wildly successful TARP program. I didn’t find much on his compensation during his brief stint as FNMA CEO. Allison served in various positions at Merrill Lynch and became a member of the board in 1997. He was a director of the NYSE from 2003 – 2005.

ALLISON GRADE – F

MICHAEL WILLIAMS [?] – FNMA CEO (2009 – Jan 1, 2012) Mr. Williams is a 20 year veteran at FNMA. While “serving” as FNMA CEO, Williams managed to scrape by on less than $6 million in 2011 alone. This could and should be considered a hardship, given the complexities involved in purloining ~ $60 billion of Fed bailout money.

Charles (my friends call me “Ed”) Haldeman has announced his retirement plans but intends to be a good sport and stay on with insolvent FHLMC until another crony can be found to fill his wing-tips.

That might take a while. “Serving” as CEO of the ultimate backstops for the lion’s share of the MBS Ponzi is very stressful.

We’ll have to accept former Freddie exec David Kellermann’s testimony posthumously. Mr. Kellermann was found hanging by the neck in the basement of his posh Vienna, VA home in the affluent suburb of Washington. D.C. way back in April of 2009. It is presumed he had no help and local police have stated there was no evidence of foul play.

And the amount of building in this area has been staggering. It is not just Manhattan. it is the boroughs and even across the rive in Jersey. The level of inventory is shocking. I guess the "freedom" tower is going to bring in tons of high paying finance jobs. That must be what some are hanigng their hat on. It is funny to see new office towers going up on that spot as so many office buildings in the financial district have been turned to condos.

I don't hear many people in NYC talking about another potential loss of income. If the Euro keeps dropping it could have a huge impact on tourism. You can't walk down a Manhattan street the past 5 years without tripping on Euro-whatever. If the Euro goes to parity that would hit this city in two huge ways, tourism and the profits of mulitnationals. Good luck on that.

I just see all of the inventory and think this city, even with all it has skimmed from the bailouts, is still living way beyond its means. And so few people here understand that the relative stability of the pats 3 years was all about the epic robbery of NYC from the rest of the country. Manhattan is a criminal enterprise from top to bottom. I can't get out of here soon enough.

We finally got out of Queens last summer. Sold our coop for double what we paid for it in 2001, cleaned out the IRA's and bought a run-down little house in the Mohawk Valley, dead-center between Albany and Syracuse. We spent about $45 per square foot, and put about $25 per square foot into repairs and upgrades, all cash and all of which we did ourselves on weekends while we transitioned. We pay only $1000 per year in taxes, and we took advantage of the gummint home-buyers tax deduction, so the IRA penalty was cut in half. We now avoid the NYC income taxes. Since our incomes up here are about a third of what we were making in the city, the Fed/NYS tax people are taking much less from us. Food, fuel, and everything else up here is cheap compared to the city, and the sales tax is less. Rumor has it that a lot of Boston and NYC financial types are coming up here to go back to the land. A young couple down the road bought a farm with 100 goats and dozens of chickens... they were from a Boston bank and decided to do something real. Their only sin was to paint their huge barn yellow... People work hard up here and don't tolerate bullshit.

Unfortunate for you is all your perspective is 100% bubble-bullshit and fraud.

You ain't seen anything like the next 25 will be -- most everyone you know/knew will be out of the business entirely.

Anyone getting appraisals at or above the mortgage is in for loss, deep loss, essentially all equity (down payments) just to start. Appraisers are a fucking joke, relentless bullshit in the upward direction. They are the barometers of how socialized crime is alive and well, and how RE can just keep going down...